2012 Cliff vs. 1986 Tax Reform Act — The `Impossible’ and `Inevitable’

Photograph by Bob Daugherty/AP Photo

Lawmakers watch closely as Pres. Ronald Reagan signs into law a landmark tax overhaul on Oct. 22, 1986.

A lot of numbers get thrown around when talking about the fiscal cliff.

If nothing is done, $600 billion in tax increases and spending cuts take effect in 2013. If the automatic cuts known as the sequester go into effect, $1.2 trillion will be eliminated from the budget over the next decade. The question du jour: How do lawmakers find a long-term solution to the $16 trillion dollar federal debt?

House Speaker John Boehner is one of many looking to tax reform as at least part of that solution. In his post-election news conference, Boehner made headlines by saying: “We are willing to accept some additional revenues, via tax reform.” He also pointed to a model for that reform: the Tax Reform Act of 1986.

That’s another set of digits worth paying attention to.

The last time the nation’s tax code was overhauled 26 years ago, Congress and the White House managed to defy lobbyists’ interests, simplify the tax code, reduce the number of brackets and breaks and lower rates for most individuals. When he signed the bill into law, President Ronald Reagan credited the American people. “They never gave up,” Reagan said. “And after almost three years of commitment and hard work, one headline in the Washington Post told the whole story: ‘The Impossible Became the Inevitable.’”

So can the ‘impossible’ happen twice?

Randall Weiss was deputy chief of staff on the Joint Committee on Taxation, which provides economic and legal analysis for the tax-writing committees of Congress, during the Reagan years. Weiss says there are some similarities between the two eras, but a few large hurdles.

First, the White House and congressional leaders were from two different parties. President Reagan pushed for and got bipartisan agreement on the tax code, which was a target for both. Rep. Dick Gephardt, a Missouri Democrat,  and Sen. Bill Bradley, a New Jersey Democrat,  were the original sponsors, and the bill passed the Senate by 97-3. This time President Obama is banking on both sides finding common ground.

Second, decades before Warren Buffett, stories about tax code fairness and the rich not paying their fair share had made it into the public consciousness. “That perception of unfairness in the early 80′s I think was a big part of what made it irresistible for Congress to enact a bill like the 86 Act,” said Weiss. Then, the focus was on tax shelters. Today, the tax rates for top earners are taking center stage.

Lastly, one thing the 1986 Act managed to do in spite of lobbyists’ best efforts — it scaled back special interest deductions. Today, limiting deductions is a key bargaining chip on the table as a revenue raiser. ‘Closing loopholes’ is a popular political stance then and now; though of course, after the Tax Reform Act passed, special interests and lobbyists managed to push through 15,000 changes to the tax code in the 26 years that followed.

Today, the top tax deductions including mortgage interest payments, charitable donations and state and local tax payments all have hefty lobbying power. Back in 1986, Congress wasn’t perfect; it bent to demands from high-tax states to preserve the local and state deductions after complaints from high-tax state lawmakers. However, Weiss says back in 1986 Congress had been saying no to special interests and raising taxes for years to counter Reagan’s tax cut in 1981. “They had experience with kind of dealing with the arguments and issues on cutting back tax exclusions,” Weiss said. “I don’t think they’ve had those kinds of experiences now.”

The final, critical difference between the 1986 deal and today is that negotiators have yet to agree on a revenue target. “Going into the 86 Act there was an agreement that basically the bill should be revenue neutral and distributional neutral and that was a bipartisan agreement and that helped smooth the way,” said Weiss.

At a time when the tax code may actually be looked at to help tackle a $16 trillion debt, that’s going to mean a lot of painful decisions.

 

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